Monday, February 10, 2014

Economist reads textbook

It's a sad day when that headline is cause for surprise, but, as Casey Mulligan is pointing out, some economists are now in full denial mode about the costs of their enthusiasms. Not Keith Hennessey;
The cost-benefit calculation of short-term compassionate aid and long-term compassion to create opportunity depends on your starting point. Most everyone would say that some unemployment insurance is good, but it’s not surprising that there is disagreement about the costs and benefits of providing more than three years of [extended] UI benefits. Similarly, there are few who would say we shouldn’t subsidize health care for the poor, but when CBO says that a new law will reduce labor supply by 1.5 to 2 percent, that’s a really big cost. And it’s bigger because ObamaCare’s subsidies are layered on top of other programs that also have income phaseouts.
 That last sentence mirroring Casey Mulligan's message in The Redistribution Recession: How Labor Market Distortions Contracted the Economy. Hennessey finally states the obvious (but isn't, apparently to some);
The costs of all three of these policies [Extended UI, raises to the minimum wage, and subsidized health insurance] include higher structural unemployment and fewer people building additional skills to move up the income scale over time. When the U.S. economy eventually recovers fully, our unemployment rate should be in the low 5s. Because they keep layering on “protections” and “assistance,” France’s comparable rate is around 10 percent. Imagine if the U.S. steady-state unemployment rate were 10 percent. We’re not there yet, but all of President Obama’s policies push us toward a European-style model.
I think movement in that direction is a huge mistake, but my point today is a more basic one. These trade-offs must be considered and debated openly, and the Obama Administration is doing a disservice by suggesting that no trade-offs exist, and that those who oppose these programs do so because they are mean. Extending unemployment insurance benefits, raising the minimum wage, and ObamaCare have long-term labor supply costs that must be weighed against their more immediate benefits. There is no free lunch here. Do you want a stronger ladder or a higher safety net?
Not to mention that last five years of anemic economic growth is partly the result of the (perhaps) well-intentioned enthusiasm for making it easier for people to own their own homes. Without the laws passed in the 1990s to undermine market standards in home lending by banks, we'd probably still be enjoying Greenspan Prosperity.

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